(Yicai) Dec. 27 -- China has brought to light a further CNY41.5 billion (USD5.8 billion) of illegal hidden debt after looking more deeply into local government borrowing since last year, according to the nation’s public spending watchdog.

Since the central government stepped up checks to figure out how much is owed by local governments, it has unearthed tens of billions of yuan in hidden debt, a report released yesterday by the National Audit Office said.

The NAO’s inspections revealed that since 2022 at least 49 administrative regions have added hidden debt without permission, such as government buyback commitments for bonds issued by companies, or advances by state-owned enterprises during the construction of public projects.

Hidden debt, or implicit debt, is not included on local government balance sheets and constitutes a key financial risk. Much is concentrated in local government financing vehicles, entities set up to facilitate financing for infrastructure and development projects. The central government is trying to resolve the risk arising from such debt, which expanded to fill funding gaps that appeared as a result of the property market’s woes and the Covid-19 pandemic. 

The finance ministry has urged the offending regions to put things right. As of Sept. 30, CNY11 billion of hidden debt had been resolved by abolishing government buyback clauses, repaying project loans, and paying arrears for construction projects, the NAO report said. Moreover, the central government has taken note of CNY19.6 billion of such off-the-books debt that is temporarily difficult to repay.

These measures provide a model for local governments to deal with their hidden debts, Wen Laicheng, professor at Beijing's Central University of Finance and Economics, told Yicai. Including these new hidden borrowings in government debt statistics means that local governments will gradually absorb these debts in the future, he added.

The NAO also disclosed irregularities in local government special bonds, including 20 regions exaggerating project revenue and underestimating project costs during their issuance, involving CNY19.8 billion. Special bonds are used to finance specific projects that are supposed to generate income for repayment.

In addition, 47 local authorities misappropriated CNY15.8 billion of proceeds from special bonds for other purposes, the report said. The finance ministry asked these regions to rectify the situation and recover the funds while strengthening the review of new issuances.

Total new on-the-books borrowing by China’s local governments hit a new high this year. In the first 11 months, they issued more than CNY9.1 trillion (USD1.3 trillion) of bonds, a 24 percent increase on the whole of last year, according to the finance ministry.

Editors: Dou Shicong, Emmi Laine